A plan being discussed by the Department of Finance and Bank of Ireland would see government money being used as a short-term bridge while the bank continued to seek private sector investment.

Under this proposal the government would provide the €1.4bn of capital without officially increasing its stake in the bank by buying stock.

Instead it would buy non-voting shares, rather than ordinary shares, leaving the State with its current 36pc stake in the bank.

The hope is that private sector finance could be brought into the bank after the March stress tests and the Government would then be repaid the €1.4bn.

The non-voting shares would be convertible into stock, so if the bank failed to raise cash at that stage the investment would convert into ordinary shares. That would leave the Government with a 70pc stake, which would be effectively nationalising the bank.

Bank of Ireland shares shot up 5.5pc last night to trade at 38.4 cents per share on the news. It's the highest level in seven weeks, valuing the bank at just over €2bn.

Bank of Ireland needs to raise €1.4bn by February 28 to meet a capital requirement set down by the Financial Regulator last November.

The deadline looks hopeless without state support because private sector investors are wary of investing ahead of stress tests due to be completed in March.

Tests

The stress tests are being undertaken by the regulator and the IMF. Depending on the results they could mean the bank has to raise even more money down the line, creating huge uncertainty for anyone considering investing.

In the meantime the State, as investor of last resort, is likely to use cash from the National Pensions Reserve Fund to meet the February deadline in order to avoid seeing the bank breach its capital requirements.

Sources at Bank of Ireland and the Department of Finance said that no deal had been agreed, but that they were working to a tight deadline.

If a cash injection is required it will have to be approved by an Extraordinary General Meeting of Bank of Ireland before February 28.

That would take at least two weeks to organise.

It means an agreement would have to be reached by February 11 at the latest.

If a deal is not hammered out the bank could seek an extension of the February 28 deadline.

A spokesperson for the Financial Regulator said that "as of now" the deadline remained in place. The spokesperson added any change would be decided by the Department of Finance.

However, a source at the department said extending the deadline was unlikely. The timetable for banks' capital requirements and for the stress test have been agreed with the IMF and EU, as well as with the banks. That makes any shifting around extremely difficult, the source said.

Bank of ireland and the Department of Finance declined to comment on the talks.